Conventional Cash Out Refi on an FHA loan

Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes

Hey guys,

I am in the educational/planning phase of my real estate investing career. I plan on starting out with a house hack using a low down payment to buy a duplex and rent out the other side. I would love to incorporate the BRRRR strategy with this house hack. However, I am just having a hard time understanding exactly how a conventional cash out refi would work with the FHA loan. I have been trying to get the numbers down and have just not been able to grasp the concept. Any help/explanation of this concept would be MUCH appreciated!!!!

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John Leavelle

Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes

Howdy @Tim Steward

Combining these two strategies is extremely difficult. The BRRRR strategy is predicated on a rapid increase in appreciation and equity in order to successfully complete a cash-out refinance. The House Hack strategy starts you off with almost nothing in equity. I really doubt $5K in Rehab will effect a big enough increase in appreciation to allow you to complete a cash-out. The property would need to be distressed, purchased at a significant discount, and require a larger Rehab budget. It would be more like $50K purchase price, $30K Rehab, $10K Holding and Closing costs. FHA 203K loan would be used for acquisition. ARV $120K. Refinance loan at 80% is $96K. If you can get these kinds of numbers then you may be able to do it.

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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
Okay so I will preface my comment as saying I’m not an expert on this but here’s what I understand based on what you’re trying to do. If you go FHA you do 3.5 percent down and will have Pmi for the length of the loan or until you refinance. The only way to refinance out of this or to do the BRRR would be to buy something distressed and rehab it to create equity or buy in a very high appreciating area. The rehab part may be hard as I believe fha has stricter guidelines then other loans.
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Tim Steward
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Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
Thanks for the input! And yes good point I would have to check on how that works with an FHA loan as far as getting the loan approved for a distressed house. I also know the 203k loan is an option as well. However my main issue was trying to figure out how the numbers would look as I tried to pull my cash out of the initial FHA loan. I get how the refi works on a property bought in cash but how does it work when I have such little cash invested. Once again ANY help is appreciated!
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Melvin ListBusiness Member
Lender · Tampa, FL · Member since 2016 · 1k+ posts · 381 votes
8y
@Tim Steward FHA will allow you to take out 85% of the appraised value
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Tim Steward
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Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@Melvin List okay got it. So hypothetically if I get 3.5% down on a $100,000 home then put $5,000 in repairs and increase the value to say $120,000. Then I get a conventional refi for 80%. This is where I get lost lol. How do I get that $8,500 I put in back? Thanks for the help!
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Tim Steward:
@Melvin List okay got it. So hypothetically if I get 3.5% down on a $100,000 home then put $5,000 in repairs and increase the value to say $120,000. Then I get a conventional refi for 80%. This is where I get lost lol. How do I get that $8,500 I put in back? Thanks for the help!
Exactly! You don't. Your first problem is: paying $100k for a home that's (only) worth $100k. The refinancing idea only works on a relatively quick time scale if, for that same $120k subsequently appraised value, you only paid $90k (or less), all-in! (ie. Not $105k). See the difference?
So you know, Real Estate Investing should not be portrayed as a get-rich-quick scheme! Cheers...
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Tim Steward
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Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@Brent Coombs Okay I'm starting to get a grasp. So say I buy at $85,000 on a property worth $100,000 put the $5,000 in and force appreciation to $120,00. With the FHA loan at roughly $2,900 plus the $5,000 I put in for repairs. I've put $7,900 of my own cash in. How would I get that money back is my question?
And of course! Definitely want to play the long game, I just really like the idea of getting started using this method as I don’t have a large amount of cash on hand
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Andrew Leighton
El Paso, TX · Member since 2017 · 17 posts · 3 votes
8y
Hey I’m not an expert, but I think your plan should go something like this. Find a very distressed property, that is very much below the comps in the area. For example $50k in a area that sells for $100-$120k. Buy it through a bank or private or hard money. Then invest $10-$20k to rehab and build equity in the property and get it appraised. If it now appraised at a value near the comps the bank will let you refi for about 80% of that. But also it seems to me that you are trying to combine 2 strategies but those two to work in your case you would need to extremely add value to your property or wait to pay off a large amount to make it worth the cost of the closing costs to refi.
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Tim Steward:

@Brent Coombs Okay I'm starting to get a grasp. So say I buy at $85,000 on a property worth $100,000 put the $5,000 in and force appreciation to $120,00. With the FHA loan at roughly $2,900 plus the $5,000 I put in for repairs. I've put $7,900 of my own cash in. How would I get that money back is my question?
And of course! Definitely want to play the long game, I just really like the idea of getting started using this method as I don’t have a large amount of cash on hand
The answer to: "How would I get that money back?" is simply: Refinance conventionally. As the owner-occupier, a Lender should let you borrow up to (say) 80% of the value of their appraisal (in this case we are assuming $120k). So when they lend you that $96k, whatever you still owed of the $82,025 you borrowed originally gets paid off, and the balance is handed to you as cash (or, credited to your account)! On those sums, you'd get back more than you had into it!
But, my question to you is: So what if you get your (small) deposit back? What will you then do?
ie. FHA-approved Lenders will likely not be fond of you applying for new low deposit loans for different primaries, every year or two, having kept your previous primaries as pure investments!
Here's something you might like to check: Afaik, unless each subsequent primary is at least 100 miles away from the one you're refinancing, the income from that earlier primary will not be included in your Debt-To-Income Ratio! [ie. You'd better have a great job!] Anyway, all the best...
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Tim Steward
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Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@Brent Coombs ohhh okay got it. Thank you! So you just get back the difference of the amount owed on new loan vs the old loan. And to answer your question my plan is to only do this for my first two properties if possible. After that I hope to have enough money saved and built up through cash flow to start buying through either private money or traditional 80/20 mortgages. And wow thank you for that information, I did not know that. So I'm assuming that's in regards to the FHA loans or all refinances? Thanks again for taking the time to provide the insight and information much appreciated!
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Andrew SyriosPro Member
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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
8y
If you buy with an FHA loan, you can get something like 96.5% of the purchase price. But, if the property has a lot of equity in it, you can then turn around and refinance that loan out with a traditional bank loan. They will probably only go to 75%, maybe 80%, but if you have enough equity, that should cover the entire loan. Now, I should note that banks will only refinance a loan at appraised value after the property has "seasoned." That's just a fancy way of saying that banks want you to own the property for a certain period of time before they will refinance for the appraised value instead of as a percentage of how much cash you have into it. The seasoning period for each bank varies, and sometimes it is basically as soon as the property is fixed up or rented.
Podcast Guest on Show #121
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Tim Steward
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Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@Andrew Syrios Thanks! Yeah I'm hoping to hold the FHA loan for a year, which hopefully will be long enough. And that's 75-80% of the newly appraised value correct?
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Andrew SyriosPro Member
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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
8y
Originally posted by @Tim Steward:

@Andrew Syrios Thanks! Yeah I'm hoping to hold the FHA loan for a year, which hopefully will be long enough. And that's 75-80% of the newly appraised value correct?
Yes, that's 75-80% of the appraised value after the seasoning period. I would get in touch with some banks and see what kind of seasoning period, if any, they have.
Podcast Guest on Show #121
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
Originally posted by @Tim Steward:
@Brent Coombs ohhh okay got it. Thank you! So you just get back the difference of the amount owed on new loan vs the old loan. And to answer your question my plan is to only do this for my first two properties if possible. After that I hope to have enough money saved and built up through cash flow to start buying through either private money or traditional 80/20 mortgages. And wow thank you for that information, I did not know that. So I'm assuming that's in regards to the FHA loans or all refinances? Thanks again for taking the time to provide the insight and information much appreciated!
Yes, "that's in regards to the FHA loans" (not all refinances).
Here's the thread I saw that mentioned the 100 miles caveat (see the first post by @Michael Cohen):- https://www.biggerpockets.com/forums/50-creative-r... Cheers...
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John Leavelle
Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
8y
Howdy @Tim Steward
Combining these two strategies is extremely difficult. The BRRRR strategy is predicated on a rapid increase in appreciation and equity in order to successfully complete a cash-out refinance. The House Hack strategy starts you off with almost nothing in equity. I really doubt $5K in Rehab will effect a big enough increase in appreciation to allow you to complete a cash-out. The property would need to be distressed, purchased at a significant discount, and require a larger Rehab budget. It would be more like $50K purchase price, $30K Rehab, $10K Holding and Closing costs. FHA 203K loan would be used for acquisition. ARV $120K. Refinance loan at 80% is $96K. If you can get these kinds of numbers then you may be able to do it.
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Tim Steward
OP
Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@John Leavelle Interesting. Very good to know that makes sense. Now my question is, would you recommend such a large rehab project for a first time buyer/investor? That’s my only issue with starting on such a distressed property. I would have no experience dealing with such a major repair. I would like to minimize risk, but obviously you have to take risks if you want to use methods like the ones I’m talking about. However, it gets done my goal is to buy two properties in the next two years to get myself started. Open to any suggestions! And thank you for your insight!
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John Leavelle
Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
8y
@Tim Steward
You may or may not be aware that the FHA 203K loan requires you to use a licensed contractor to do the work. So it's a matter of you feeling comfortable overseeing the project.
If you have no experience or knowledge of construction, house repairs, or landscaping it might not be in your best interest to tackle such a project for your first deal.
Do you know anyone that could provide the guidance and help you?
Do you have enough cash to make a conventional purchase? I’m assuming you don’t since you want to House Hack. If you do not you might need to revise your 2 properties in 2 years goal. Or start looking at other strategies and creative financing methods.
Maybe you should stick to getting the first one using the House Hack, develop some experience, and review/revise your goals 6 to 12 months after that.
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Tim Steward
OP
Rental Property Investor · Wilmington, DE · Member since 2017 · 15 posts · 2 votes
8y
@John Leavelle Yeah, I'm familiar with the 203k loan. I guess learning as much as I can about rehabbing would probably be a good place to start! I'm definitely going to have to start with a house hack and then your right I'll have to evaluate my situation at the time. I have about 7-9 months until the purchase would make sense and 4-5 months until I'll even know which market I plan to start in. So I guess for now I'll get to reading! Thanks for the advice!
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John Leavelle
Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
8y
@Tim Steward
I would suggest you get J Scott’s books “The Book on Flipping Houses” and “The Book on Estimating Rehab Costs “. They will give you a good basis to learn from. That is if you haven’t already purchased them. Good luck.
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